Corporate PPAs: An alternative financing model for renewable energies
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Corporate PPAs: An alternative financing model for renewable energies
Corporate PPAs: An alternative financing model for renewable energies I. Established promotion II. Corporate PPAs as new financing of renewable energy instruments for renewable energy Companies around the globe are increasingly active The development of Corporate PPAs for the financing in procuring or investing in self-generation of renewa- of renewable energy sources has been most notable ble energy. So-called corporate sourcing of renewable in the US in the past years. This is due to the fact that electricity is a still growing global trend and driver of unlike Germany, the US has a support scheme for re- renewable energy growth. Several main driving forces newables based on tax exemptions (so-called Produc- behind this development can be identified: The reduc- tion Tax Credits). The number of Corporate PPAs in the tion in the costs of renewables, pressure by consum- US has thus been growing rapidly. While the AMER re- ers and other stakeholders on companies to become gion (North, Central and South America) still accounts more environmentally friendly and to reduce the own for the largest share of Corporate PPAs concluded, carbon footprint as well as the increasing meaning of they are also increasingly used in EMEA (Europe, Mid- corporate sustainability among investors just to name dle-East and Africa) and APAC (Asia Pacific) regions. a few. While some companies very early on reacted A Corporate PPA can be understood in principle as a to the trend of “going green”, implicitly accepting that long-term electricity supply contract, which is conclud- becoming or being green is not necessarily just a cost ed between the power producer and a company. Those of doing business, for others, becoming environmen- companies are usually end consumers, but traders or tally friendly seems to be a somewhat longer process. energy supply companies could also be considered as As for example the first German Renewable Energy Law contract partners of a Corporate PPA. Different varia- (EEG) came into force, the established promotion of re- tions exist (details below) but the basic principle of a Cor- newable energy has been characterized by the pay- porate PPA is that it offers the electricity consumer the ment of a given sum in Cents per kWh produced over advantage of long-term price security and guarantees a period of support of 20 years. Even though the spe- in return long-term revenues to the electricity producer. cific terms for support have varied over the years (e.g. If renewable energies were no longer entitled to sub- feed-in tariff, financial support, market premium, appli- sidies in the future, producers would always have the cable value) the underlying concept of promotion has option of selling their electricity output in the whole- remained the same. There is, however, a growing call to sale market at market prices. However, they would put an end to public subsidies for renewables requiring then be exposed to the forces of supply and demand that they present themselves to the market. The aim is to and to correspondingly volatile prices. A Corpo- let the renewable energy sources establish themselves rate PPA, on the other hand, would stabilise both the on the market without any public support and to sub- electricity output sold and the price to be achieved. ject their profitability to the law of supply and demand. The market itself is already creating models for the project development of subsidy-free renewable ener- gy installations, in Europe and abroad. This evolution will not only affect future installations to be commis- sioned in forthcoming years. It also concerns existing installations for their revenues after expiration of the legal period of remuneration. While the EEG in Ger- many, as well as similar laws in other European coun- tries, was designed to promote renewable energy, corporate sourcing of renewables now seems to have a similar potential to attract significant additional in- vestment in the renewable sector. At the same time, it might be able to support the energy transformation and help reaching international climate targets. Cor- porate Power Purchase Agreements (Corporate PPAs) that may come in different forms are the most prom- inent example of recent corporate sourcing activities.
Corporate PPAs: An alternative financing
model for renewable energies
1. Why do companies conclude Corporate PPAs with power producers?
From the client’s perspective, there are two main reasons for concluding a Corporate PPA. First, economic con-
siderations are crucial because companies are striving for the greatest possible price stability and therefore
do not want to expose themselves to the possibly highly volatile procurement costs on the electricity markets.
Alongside this economic component, “green” factors are important as well, as many companies are in-
creasingly striving to partially or entirely minimise their CO emissions by purchasing green electricity. This
second aspect has recently been observed in the case of several large tech companies, for example, which
wish to give their firms an image of sustainability by concluding Corporate PPAs - in some cases covering
their entire electricity requirements - and thus present themselves to their customers as “first movers”.
2. What are the different variants of Corporate PPAs?
Typically, two variants of Corporate PPAs can be distinguished. In the case of a physical Corporate
PPA, a contractually defined quantity of electricity is supplied directly from the producer to the con-
sumer over a contractually defined period (e.g. ten to twenty years) from a power plant built for this
purpose. This can be done via a direct line or via the electricity transmission / distribution grid,
which in turn has an impact on the grid fees to be paid. Physical Corporate PPAs also have two sub-
types: the producer can assume the role of a classic supplier with all the associated full-service ob-
ligations (direct Corporate PPA) or it can seek support of an established supplier, which in turn as-
sumes tasks such as the provision of balancing energy or load forecasting (sleeved Corporate PPA).
In addition to physical Corporate PPAs, so-called virtual or synthetic PPAs have developed. This is
a financial product that does not include the physical supply of energy. It has become more wide-
spread internationally due to a greater flexibility (e.g. the ability to supply several locations). Under
a virtual or synthetic Corporate PPA, the parties agree on a fixed price (“strike price”), but both pro-
ducer and consumer sell or buy their electricity on the spot market. If the spot market price is above
the agreed fixed price, the producer reimburses the difference to the consumer and if the spot
market price is below the agreed fixed price, the consumer pays the difference to the producer.
26
€/MWh
25
24
23 The producer pays the
22 difference to the customer
21
20 Fixed price within the PPA (Strike price)
19
Fluctuating
18 electricity
17 market price
16 The customer pays the
15 difference to the producer(s)
14
13
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
hoursCorporate PPAs: An alternative financing
model for renewable energies
Such an arrangement can therefore be described as a classic Contract for Differences (CfD).
With regard to pricing, a large number of options are conceivable, depending on the preferenc-
es of the parties. Fixed prices, minimum prices, take-or-pay obligations, indexing, price floors and
price caps can be considered, in order to best reflect the commercial interests of both parties.
In addition, both parties can hedge their position at the same time on the futures market. Theo-
retically, Corporate PPAs can be hedged with futures of up to a maximum of six years, although
in practice, due to limited liquidity for such products, hedging is often only possible for approxi-
mately three years. For periods beyond this, an assessment can be carried out on the basis of elec-
tricity price scenarios. However, this requires sufficient resources and in-house experts or the use of
external expertise. For example, one can imagine a scenario in which the parties to a contract with
a term of ten to twenty years agree that the producer will initially receive a price above the cur-
rent market level but that the later electricity price will then be below the expected market level.
3. What are the legal challenges related to Corporate PPAs?
The conclusion of a Corporate PPA is more complex than a traditional electricity sup-
ply contract mainly due to legislative and regulatory requirements and as it opens up ad-
justment possibilities for the contracting parties. As the supply of electricity across the trans-
mission or distribution network is generally regulated and requires the supplier to hold a
supply license, a sleeved Corporate PPA is more common in Europe than a direct Corporate PPA.
In addition, the price mechanism requires special attention, as a large number of options are possi-
ble to reflect the commercial interests of the parties, as referred to in section 2. In legal terms, it must
be pointed out that there is full freedom of arrangements for contracts subject to German law, if the
relevant clauses have been negotiated in detail and are therefore not subject to any restrictions un-
der the law applicable to General Terms & Conditions (AGB). However, as the price mechanism is gen-
erally one of the core provisions of the agreement, this hurdle is likely to be overcome in most cases.
4. What is a realistic timeline for the conclusion of a Corporate PPA?
Assuming that the producer has already found a buyer during the project development phase
and that the has already defined a corresponding project and as a result the requirement pro-
file for the Corporate PPA, a period of approximatively three to six months as of signing of the
Letter of Intent is likely to be required for the topics of financing, contract negotiations, plan-
ning and approval. In the case of a physical Corporate PPA, a further period of three to six months
should be taken as a basis for the actual construction of the plant and its grid connection.
After commissioning of the plant, the actual period of electricity generation typically amounts to a period
of ten to twenty years. In this respect, it is up to the negotiations between producer and consumer to decide
on the contract term for a Corporate PPA. Especially long-term Corporate PPAs need specific legal advice.Corporate PPAs: An alternative financing
model for renewable energies
5. At a glance: pros and cons of Corporate PPAs for producer and client
The benefits and disadvantages of Corporate PPAs can be very succinctly summarized as follows for
both contracting parties:
Benefits Disadvantages
n No additional trade margins, as direct con- n Increased contract complexity and risk
tract between producer and consumer of regulatory changes
Customer
n Long term price stability (often indexed) n If a long-term price is set, adjustment
n Budget and planning security due to hedg- mechanisms are required in the contract in
ing against volatile power spot prices case of unforeseen market distortions
n First mover image in regard to CO2 emissions n Corporate PPA is regarded as a derivative
under IFRS and requires extensive
n Possible construction of a wind or solar park reporting (fair value accounting, mark-to-
specific to the customer concerned market approach, daily value at risk valua-
n Flexibility in the procurement of electricity tion)
Producer
n Binding purchase commitment over a long- n As compared with classic electricity supply
term period at a fixed price (often indexed) contracts, increased contract complexity
n Creditworthiness of the customer(s) enables and risk of regulatory changes
favourable project financing n If a long-term price is set, adjustment
n Reduced cost of capital and increased mechanisms are required in the contract in
capacity to obtain credit for such projects case of unforeseen market distortions
We advised on Corporate PPAs in a number of cases and in different
jurisdictions in Europe and overseas. Please do not hesitate to get in touch
with us in case of any questions and/or to discuss further.
Your Experts
Carsten Bartholl Dr. Markus Böhme LL.M. Nicolas de Witt Dominic FitzPatrick
Hamburg, Germany Dusseldorf, Germany Paris, France London, United Kingdom
+49 (0)40 3 68 03 108 +49 (0)211 8387 430 +33 (0)1 72 74 03 33 +44 (0)20 7300 4689
c.bartholl@taylorwessing.com m.boehme@taylorwessing.com n.dewitt@taylorwessing.com d.fitzpatrick@taylorwessing.com
Europe > Middle East > Asia taylorwessing.com
© Taylor Wessing 2020
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